Open Season on Russia's Oligarchs
Is Putin behind the drive to rein in the business elite?

Russian financier Vladimir O. Potanin is reeling. On June 20, a Moscow prosecutor filed a lawsuit charging that the 1997 privatization of his giant metals company, Norilsk Nickel, was illegal. The company's shares promptly plunged 10% on the Russian stock market. Unhappy news for Potanin and Norilsk investors--but few others are weeping.

Potanin is one of the infamous oligarchs--the oligarkhi, as Russians call them--who amassed a fabulous pile of wealth after capitalism bumpily replaced communism nearly 10 years ago. In a country where a decent salary for workers is $200 per month and most folks make much less, an aggrieved public widely reviles this band as greedy and undeserving. And the magnates well know it. ''I do not want people to hate me,'' Potanin told Business Week three days after the lawsuit was filed. ''I do not want to be rich in a poor country.''

It's a bit late for such sentiments. Three months after his election, it's starting to look like open season on oligarchs in President Vladimir V. Putin's Russia. The upshot could be a new battle for wealth as vulnerable barons scramble to protect their assets from the government, predatory rivals, or workers.

CAMPAIGN RHETORIC. There is a lot at stake. A fair-size chunk of the $210 billion Russian economy is subject to control or manipulation by 20-odd business titans, most of whom operate from fortress-like offices in Moscow, protected by armed security guards. They control much of Russia's enormously lucrative natural resources sector--oil and gas, aluminum, and other metals. Norilsk is the world's largest nickel producer, with 1999 sales of $2.7 billion.

Putin set the tone for the crackdown with campaign rhetoric proclaiming that Russia needed a strong state to eradicate corrupt business titans and criminals. That's not only a winning populist appeal. It's also music to the ears of law-enforcement officials, many of whom hail from Soviet times, when there was no such thing as private property. ''Many people from the government have the feeling that it's now their time,'' says Moscow manufacturing baron Kakha Bendukidze, who is worried about threats to his own holdings.

The Norilsk lawsuit follows the arrest and detention of Vladimir A. Gusinsky, who became a media baron after making a banking fortune in the early 1990s. Meanwhile, the most notorious oligarch of them all, Boris A. Berezovsky, could be ensnared by a recently reactivated investigation into whether money from national airline Aeroflot was diverted offshore. Berezovsky has in the past enjoyed tight relations with Aeroflot management.

In principle, a crackdown on oligarchs can be seen as long overdue, a quest for justice. After all, most if not all of the oligarchs acquired the bulk of their wealth through sweetheart deals with the government. The trouble is, this crackdown looks more like Kremlin politics, spiced with warfare between rival business clans, than principle. Gusinsky's NTV television station is a frequent Kremlin critic. Potanin signed a letter protesting Gusinky's detention. Moreover, his business deals have brought him into frequent conflict with other powerful magnates, including Berezovsky. There is a widespread perception, fair or not, that the Norilsk lawsuit is inspired by a rival who got to the prosecutor. ''Nobody believes that the Norilsk Nickel case is a real investigation,'' says liberal Duma deputy Boris Nemtsov, a former Deputy Prime Minister. ''This is a dirty competition between oligarchs.''

Even those with links to Putin may end up targets, too. Berezovsky wielded considerable influence in Boris Yeltsin's Kremlin and last year helped to install Putin as Prime Minister. But now there's a chill. He is attacking as authoritarian Putin's plan to consolidate power over Russia's regions. For their part, Putin's allies in the security services have long despised Berezovsky--they see him as a gangster with suspiciously close relations with the Chechens--and hope to put him one day in jail. That won't be easy: As a Duma deputy, Berezovsky has immunity from criminal prosecution that can be stripped only by a majority vote. His assets, however, enjoy no such protection.

Putin is playing a crafty game. Even as he sets the tone for the crackdown on the oligarchs, he is not publicly orchestrating the attacks. He knows that talk of deprivatization scares the Western investors he is trying to attract. That's why the purge will go only so far. When the Putin government unveiled its economic program on June 28, Prime Minister Mikhail M. Kasyanov said the government opposed a wholesale undoing of past privatizations and does not aim to be an active agent in the redistribution of property.

At the same time, Putin has not spoken out against the new legal threats to oligarchs. A letter from Potanin, asking for the President's support, has so far gone unanswered. Sensitive to the popular mood inside Russia, Putin may not want to deplete his political capital by protecting such widely disliked targets. Communist legislators, who have supported parts of his program, certainly don't want to hear such a defense. ''For me, the words oligarch and criminal are identical,'' says Communist deputy Anatoly Lukyanov, jailed by Yeltsin for backing the 1991 putsch to keep the Soviet Union intact.

Plenty of workers feel the same way. Bendukidze is combating an effort by factory hands to give back to the government a controlling interest in Red Sormovo, a defense shipbuilding plant in Nizhny Novgorod. Bendukidze acquired a large block of shares after the plant was privatized in 1994. Sergei Ivanov, Putin's security council chief, is siding with the workers on grounds of national security.

RIVIERA ESTATES. The oligarchs have done plenty to stir resentment. Although the market capitalization of many companies linked to oligarchs declined after Russia's financial crisis in 1998, the revenue streams remain considerable. Economists tend to see the oligarchs, with some exceptions, as short-term cash-flow managers, rather than long-term stakeholders. The leading oligarchs are undoubtedly responsible for a good-size portion of the billions of dollars of capital outflow suffered by the economy in the last decade. The money goes into everything from Spanish Riviera estates to offshore banking accounts. Precious little seems to find its way back into Russia.

Without a red light from Putin, the empires of the oligarchs are likely to face continued attacks from various quarters. Lawsuits aren't easy to win--indeed, a Moscow court has already told the prosecutor that the Norilsk filing is unacceptable in its current form. But such actions nonetheless can stir up a hornet's nest of trouble, including unwanted attention, for the afflicted magnates.

Trouble for asset-stripping oligarchs may not be a bad thing. Yet even as Putin preaches that business magnates should no longer gain special favors from government, insider deals of the sort that spawned the first generation of titans continue in his administration. A valuable mobile-telephone license was recently awarded at a discount and without an auction to a close Putin ally, Valery Yashin, general director of telecom giant Svyazinvest. Putin installed Yashin as head of the company last year. The old crew of oligarchs is sweating, but a new gang seems ready to take their place.

By Paul Starobin, with Catherine Belton, in Moscow

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Open Season on Russia's Oligarchs

RESUME: Vladimir Potanin

RESUME: Boris Berezovsky

RESUME: Vladimir A. Gusinsky

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